Public Entrants, Public Equity Finance, and Creative Destruction

Abstract

We explore the importance of new public firms and public equity finance for R&D and creative destruction in the U.S. high-tech sector. Between 1970 and 2004 over 1900 new public firms enter a small number of high-tech industries, substantially altering the focus of U.S. manufacturing and dramatically changing the composition of publicly listed firms. These public entrants are increasingly R&D intensive and rely extensively on external equity finance in the 1980s and 1990s. We estimate dynamic R&D models and find a strong link between public equity finance and R&D for new entrants, but not established entrants or incumbents. Further, later cohorts of public entrants rapidly acquire market share from existing incumbents and have a substantial aggregate economic impact: by 2000, recent public entrants account for almost half of high-tech sales and more than half of R&D. Variation in the availability of public equity finance has a marked impact on entrant R&D and the rate at which entrants take market share from incumbents. Our findings identify a key channel through which public equity markets facilitate the process of creative destruction.

Keywords: IPO, Stock markets, Finance and growth, Creative destruction, Innovation, R&D

JEL Classification: D92, G10, G32, O30